Is inflation under control? Does anybody know?

The #3 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Inflation is under control."

According to that, the "official" inflation rate is 3.8%. If that is true, the value of a U.S. dollar will be cut in half in just 19 years. If you're retiring now at age 65, the value of your savings will be diminished by half, before you're 85. And although that may sound very old and distant, large numbers of people are living to, and beyond, that age.

If you're just starting your work career, 19 years is less than half of the time you'll work before retiring.

It's a favorite theme of investment newsletter salesletters that the official inflation rate is understated by the government. I don't know, not having access to all their information.

And I doubt the real accuracy of the government's information. I remember once when I was still in college. The U.S. dollar was worth more than twice what it is now (though I didn't have nearly as many of them), but inflation was much higher than it is now.

I was working part time at Pizza John's (NOT "Papa" John's!), a local pizza restaurant. After a lunch hour rush, a young woman working for the government came in to ask about price increases to keep track of inflation.

She was young and nice looking so my boss enjoyed talking to her for a few minutes, flirting with her, but when she kept asking him about when it was that they'd last increased prices and whether a potato slice always went with a certain sandwich, I could see him getting bored and impatient, and he just put her off with whatever he felt like saying.

So I'm not convinced the government actually knows what the "true" rate of inflation is.

However, it is the greatest single financial enemy of anyone who's not actively increasing their income.



inflation
inflation

Prepare for retirement before it's too late

The #2 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Your retirement is safe." Well, Bernard Bernake new Chairman of the Federal Reserve is trying to sound the alarm, but no politicians are listening. To be fair, President Bush tried to implement reform of Social Security early in 2005 but he was blocked by the expected opposition from the Democratic and pseudo-Republican liberals who refuse to touch the sacred cow of Social Security.

Yet anybody who looks can see the problem coming. There's not going to be enough money in the Social Security trust funds for the baby boomers. Not enough money to pay for Medicare expenses. Not enough pension money in the pension funds.

Even worse, there's just plain not enough money in the world!

And Japan and many European countries have an even worse discrepancy than the USA!

Sooner or later, we're going to see a massive theft of Social Security from the "rich." I say "theft," because Social Security was originally sold the American people and promoted as "insurance," not welfare. The taxation of Social Security for people with incomes over $25,000 which began about 10 years ago was an outrageous violation of this principle which nobody objected to, because hey, who cares if the "rich" (elderly people who make over $25,000 annually) don't like it -- why should they get it if they don't need it? Because they paid for it, that's why.

Just lately the government instituted the Income Related Monthly Adjustment Amount (IRMAA) part of the Medicare Modernization Act of 2003 - which forces elderly people who have over $80,000 in income to pay more of a Medicare Part B premium than other people. Again, class warfare.

And class warfare rhetoric is just beginning. We can expect to see higher Social Security taxes, an increase in the retirement age and more means testing (though it may just be backend taxation) of Social Security benefits.

If you save and invest money, even if it's just in certificates of deposit, you're going to be punished, to pay for the people who didn't save anything. Also watch out for a crackdown on people who have money in bank accounts in other countries. The government will want to get its hands on your money no matter where in the world it is.



baby boomer investing
baby boomer investing

HYIP and other investing scams

I hope this doesn't apply to any readers of this blog, but last night I was rereading James Glassman's book THE SECRET CODE OF THE SUPERIOR INVESTOR, and I reflected about his characterization of investors as either outsmarters or partakers. I have certainly been an outsmarter for most of my investing "career," (except for contributing to my retirement fund at work), and I've paid the price.

Outsmarters don't win with the possible exception of when they have enough control to manipulate the results, which could be illegal and certainly is unethical. This may apply in some limited circumstances, but not to the vast majority of us.

At its most extreme, the outsmarter mentality is so out of touch with reality that it makes people susceptible to fraud. If you're going to listen to stock tips on cable TV, why not listen to them from boiler room telephone con artists? If you're going to put your money into overseas hedge funds then why not fall for some other fancy investment in the Virgin Islands.

If you think you really understand how the markets work in the short term, why not day trade? If you think someone else really understands how the markets work, why not send them your money to help you get rich, even if they don't give you any details, as few HYIP scams even try to do?

It's a truism that con artists claim that their cons work only on greedy people who think they can get something for nothing.

I don't know if con artists really claim that, but it does seem to apply. I remember that when I delivered pizza the people who wanted to cash bad checks for more than the cost of the pizza would add a large amount of money to the total as my tip, so I'd accept the check. And the infamous online Nigerian scam certainly also relies on the greed of its victims.

So the same "outsmarting" mentality that leads people to lose money through stock tips, paying brokerage commissions through trading, paying high mutual fund fees, paying even high hedge funds fees, paying interest on the leverage of buying stocks on margin . . . can lead to becoming the victim of out and out scams and frauds.




HYIP and other scams
HYIP and other scams

The Bond Desk by Neil George

My quest for information on fixed income investments such as bonds led to this report by Neil George. It's selling his newsletter on bonds, which is expensive, so I'm not pushing anybody to subscribe. I wouldn't get anything out of it if you did, and I myself haven't either, but I am curious. What kind of bonds are currently yielding 17%? How much risk is involved? I do appreciate his early words about how wealthy investors don't want their money sitting in mutual funds wasting time -- they want to get paid. That's the whole theme of this blog and my site, getting paid now. It's encouraging to know that the ultra-wealthy share this attitude :)

The Bond Desk report



bonds
bonds

$300 million investment in old economy biz

Here's an interesting investing question -- would you risk $300 million of your own money to buy an "old economy" stock with a business that's going downhill thanks to the Internet?

That's what Sam Zell, a real estate mogul, did recently by buying the Tribune Company, owner of the LA Times.

At what point are troubled companies a true "value" investment and when are they low-priced for good reason?

Newspapers are losing readership and advertising dollars to the Internet. This is due to a number of factors -- online news sources are more up to date and convenient. People's demand for local news isn't really great enough to justify an extensive staff of reporters for local news, and they can't afford to send reporters all over the world as in the old days.

I believe that's it's also partly because major newspapers in this countries are secretly aiming to destroy this country, and many intelligent people realize that they're anti-American, though few realize how consciously many newspaper editors and reporters are actively working to bring down freedom and capitalism.

But that's also true of TV journalism, which is not so much on the decline, though I think eventually it will go down the tubes. CNN and Fox will supply all national and international news and the local news teams will cover fires, car crashes and mayor news conferences.

Yet many businesses have been on the decline for years, but still manage to make money, such as railroads. Maybe Zell has a plan to revolutionize the newspaper industry as Nucor did for steel at a time when every other U.S. steel company was losing to competition in Germany, Japan and South Korea.

It can be better to pay a low price for a declining but still viable business than a high price for an expanding business.





declining industry investing
declining industry investing

Was Enron truly ever viable?

as Enron ever a viable, long term company? I'm thinking about that because I just read a history of the company from its beginnings as a merger between two oil pipeline companies through the bankruptcy.

At one point early in its history, Enron's top executives decided to make it a modern company, and it expanded enormously. Not just in supplying energy, but in trading it the way Wall Street firms trade options. They even hired some traders from a major bank to come and teach their people how to make trades.

Within a few years, Enron was trading electricity, natural gas, the weather, paper pulp, metals -- almost anything except the sheer paper assets or ordinary exchange-traded commodities which are what we normally think of as "trading." They were making markets in these things, plus financing projects.

The author describes Enron in the nineties as certainly being a very innovative company. They were enormously selective in who they hired, picking only the brightest and most ambitious, and fostered a culture of entrepreneurialism. If you worked for Enron, you had wide freedom to think up your own project and then network among others for support, both financial and material. If you could get the project going, it was yours. If you succeeded you were a hero. If not, try again. The ability to make mistakes and learn from them is attractive. Though it's doubtful that the company as a whole did learn from mistakes, since people came and went so much.

Can a corporation continue indefinitely going hither and thither without any overall purpose or control? There were a few years Enron felt it could trade and profit from any market at all. This also helped lead to losses. Yet they did not enforce trade size limits on their traders, so unless they found truly inefficient markets to trade, there was always substantial risk of overtrading. Always traders to commit you to positions too large is NOT "managing" risk. (Just ask Barings Banks - a hundreds years British institution that allowed one trader in Hong Kong to drive it out of business.)

What lead to their ultimate downfall was applying that mindset of financial manipulations to their own accounting and financial systems. So they "managed" their ever-growing debt as they "managed" risk -- and ultimately couldn't sustain it.

What if a well-managed company positioned to exploit market inefficiencies in energy and with sufficient internal controls and honest, conservative accounting and a long-range vision everybody understands and follows . . . in short, what Enron lacked . . . could they make the same business work?

I don't know, but as an investor I much prefer an "old economy" type of company that sells a well-established and in-demand product or service for a profit. Although I don't think the efficient market hypothesis applies to closed markets such as electricity, I always question the ability of traders to beat the market on a sustained, long term basis.

I suspect that supplying people and businesses with needed and desired goods and services is a better business model.

Enron viability
Enron viability

Dividend paying stocks more dependable than "earnings"

I got an email today from Schaeffer Research, which is basically Bernard Schaeffer who publishes The Options Advisor, his entry-level option newsletter product, predicting that there're going to be a lot of disappointing earnings announcements in the weeks to come, now that the first quarter has closed out and companies will be providing their net earnings for the first quarter.

And of course he says this will mean a lot of profit opportunity -- he foresees a lot of volatility.

Yet the thrust of the email is bullish, so apparently he think that companies will post earnings that are actually higher than investors expect. So even if they're lower than the last 3 years, they'll be higher than expected, and that means a lot to a lot of traders.

Of course, earnings always go up and down. Plus, earnings is an accounting figure subject to accounting manipulation. Cash flow is a more dependable indicator in many instances, because it can't be manipulated. Either there's money in the bank account or not. The bank doesn't care about appreciation or off the books limited partnerships.

And the best way to evaluate cash flow is to find the companies that continue to increase dividends year after year -- they are more dependable than quarterly earnings statements.

Schaeffer's tracks a put/call ratio, and that's the highest it's been in over 3 years. So stock prices may well go higher, if he's right.

But remember that you can spend dividends and still keep the stocks.




dividend increases
dividend increases